Can’t pay your taxes? What to do about extensions and interest

Even if you file an IRS tax extension form, you need to pay at least 90 percent of your tax liability by April 18. Image: MoneyBlogNewz / Flickr / CC-BY

The IRS deadline for 2011 may be three days later than usual, but some people still need extra time. If you cannot pay your taxes or file on time, addressing the situation quickly is key. Ignoring the problem of late taxes will make the situation worse.

Extending your filing deadline

If you will not be able to file your full tax return by the April 18 deadline, you need to file an extension. IRS Form 4868, properly filed, will extend the deadline for you to file to Oct. 17. Extending the filing deadline, however, does not extend the deadline for you to pay your taxes. Form 4868 requires you to make an estimation of how much tax you will owe and pay it at the time you file the extension. Failure to file an extension or a return will result in a 5 percent per month penalty, up to 25 percent of your total tax bill.

Extending your payment deadline

Your tax payment deadline is separate from your tax filing deadline. If you cannot pay your entire tax liability at the time you file, you should still file your taxes. That way, you can avoid paying both a failure to file and failure to pay penalty. You should pay as much as you can as quickly as possible. If you can, pay 90 percent or more of your tax liability when you file. This will cancel all penalties for six months, until the extended filing deadline. If you are filing on time but cannot pay, include what you can and wait the 30 to 45 days it will take for the IRS to send you a bill. Interest and penalties on unpaid balances compounds by 4 percent daily, so paying quickly is key. If you simply cannot pay, contact the IRS as soon as possible. You should call 1-800-829-1040 and discuss payment extension or installment options.

Exploring tax settlement options

There are plenty of TV advertisements offering to settle your tax debts. Using these tax settlement services is, most of the time, not a good idea. Getting same day loans to pay the debt would be a safer option. These tax-settlement services file an Offer in Compromise with the IRS, which individual taxpayers can file on their own. An Offer in Compromise should be the last resort, after attempting to create a payment plan with the IRS. In short, keep communicating with the Internal Revenue Service — the longer you wait to contact the agency, the more money you will end up owing.